Nobody knows how to react to the
mooted American default. The US has been the cornerstone of free
market economies for decades. So the contagious fear, however
stoked by the frenzy of media and political theatrics, is not
unfounded.

People are worried that the default will trigger a collapse of
the US dollar and treasury Bills (T-bills) and then the collapse
of the world economy. Nevertheless, their fears are
over-stretched. The global dominance of the US dollar and T-bills
is not underwritten by those politicians' scheming towards the
moral high-ground of an election. This dominance is deeply
entangled in the decades-long building of one of the most
profound global empires in the human history: The American
Empire.

First, sustaining the global dominance of the US dollar and
treasure bills is the absolute prerequisite for sovereign states
to subscribe to the US imperialistic issuance and alliance
against many Geo-political risks and economic and diplomatic
debacles (see in the pie-chart below).

According to a detective-like analysis on the cunning
report from Budget of the United States
Government,in 2009 military spending accounts for 54% of the
total outlays of the federal funds."current military” includes
Dept. of Defense ($653 billion), the military portion from other
departments ($150 billion), and an additional $162 billion to
supplement the Budget’s misleading and vast underestimate of only
$38 billion for the “war on terror.” “Past military” represents
veterans’ benefits plus 80% of the interest on the debt.

In 2010, $80 billion was
allotted to the US intelligence agencies' worldwide
operations.In 2011, $54.6 billion was
requested for U.S. diplomacy and development efforts, after
accounting for programs outside State and USAID, such as the Peace Corps, the
Broadcasting Board of Governors, and the Millennium Challenge
Corporation. The colossal stakes here are not just for the US's
sake. It is also necessary for the US to effectively manage the
threatening global volatility on military and economic levels for
its diplomatic allies and trading partners. For example, In the
South China Sea, Japan, Philippine, Vietnam and Taiwan are
increasingly demanding the US to
enhance the buffer between them and the more assertive China. In
the middle east, Saudi Arabia, Israel and other
allies have long been agitated by Iran's nuclear
ambition and the regional instability imposed by Arab Spring.

To elicit the US's cooperation on economic and diplomatic issues,
Frenemy such as China has always applied the trickery of
accelerating T-bills buying to show friendly gesture when the
relationship with the US turns sour. It is no coincidence the
more screwed up the world, the higher the demand for the
T-bills.\

Second, all the major economies' performances are heavily
collateralized against the US deficit. Failure to finance that
deficit will render these economies' production over-capacity so
severe that the blow will be lethal. In 2010, the gap between US
imports from China and what it sold to the country rose to
$273.1bn , the largest
trade imbalance the US has ever recorded with a single country.
When all the math is done, without the US, China is running a
trade deficit with the rest of the world (the red
line).

In the meantime, the US
accounts for 15.4% of all Japanese exports and 9.7% of all
Japanese imports. The US accounts for approximately 10% of all
German exports and 10% of all German imports. That year the US trade deficit with the
rest of the world hit $497.8bn,up 32.8% on the year before, the
biggest annual percentage gain since 2000. No other nation came
close to the U.S. deficit in that year while the US major trading
partners all posted strong export growth. By shouldering a
decisive chunk of the global imbalance, the US greatly helps many
countries' economic recovery.(Japan's trade surplus was more than
2.5 times higher than the previous year at $82 billion. Germany had
€140.3bn trade surplus.
China's 2010 trade surplus hit $183.1 billion.) The trade war
didn't beak out under such a grievous global imbalance, mainly
because the US didn't initiate an all-out trade war against
China. Or we will all live behind the iron curtains of tariff
retaliation. If these trade surplus countries fail to prop up the
T-bills, the dollar will collapse as well. That will send the
value of their own currencies through the roof, which will derail
their export-led economies and precipitate a serious cost-push
inflation to squash the profit margin of their export
industries.

Third,The liquidity and shock absorber of the global financial
system are most heavily leveraged on the treasury bills. The
melt-down of T-bills will precipitate the collapse of many
profitable arbitrage opportunities. The post-crisis capital
requirements for banks enhance the importance of money market.
T-bills are the most marketable money market security and the
most important collateral. The fire sale of T-bills will paralyze
the repo market, drive up the sweeping borrowing costs, suck dry
the liquidity and close up the spread in the carry trade. The
ensuing panic will be contagious. Many financial institutions
will fall, even including some gigantic sovereign funds

Finally, there is no other sizable asset pool other than T-bills
able to absorb the chunk of the $10 trillion worth
foreign-exchange reserves piled in trade surplus nations. At $9.3
trillion outstanding, the U.S. Treasury market is second in size
to Japan's government bond market, whose $9.7 trillion makes it
the world's biggest. While Japanese bonds are mainly (90%) sold
to domestic investors, the US sells around half of its bond to
outsiders. It's unrealistic to say to convert the foreign reserve
to German bunds, British gilts, or even gold. Because these
markets are puny compared to the mammoth portfolios hoarded by
countries such as China and Japan.

As long as the US stays as a global empire, shoulders much of the
global imbalance, and export-oriented economies refuse to
alleviate the global imbalance and continue to swallow up
gargantuan trade surplus, the US dollar and T-bills will perch on
the top of the world. Who said the whole world can't roll over as
much as T-bills to entertain the American politicians' thirst for
political theater and flirtation with a temporary default? It's
not a sucker punch. Take it however it comes. No need to panic
and ignore the rating agencies.See the chart below, there were
countries doing rather well after losing triple A. Another good
news is China is bluffing when it says it will reduce its t-bills
holding. Under the radar, China is gobbling up t-bills through
proxy agents all over the world.

Once the market is weaned off the fear, everything will go back
to normal. The world indeed needs to decouple its well being from
the US deficit. But that won't happen in the next decade.Things will go terribly wrong if there is a
sweeping house bet against T-bills. And then everyone will start
guzzling T-bills again, just like S&P's downgrade never
happened. The worst scenario is the Federal Reserve can initiate
QE3 to save the day. S&P can't terminate the dollar's status
as the world reserve currency. And guess where is everyone going
to park the dollars from QE3?